Document

Effective February 1, 2021, CorEnergy Infrastructure Trust, Inc., (“CorEnergy” or the “Company”) acquired a 49.50 percent interest in Crimson Midstream Holdings, LLC (“Crimson”), with the right to acquire the remaining 50.50 percent interest, in exchange for a combination of cash on hand of approximately $74.6 million (after giving effect to initial working capital adjustments), commitments to issue new common and preferred equity with a fair value of $115.3 million (also after giving effect to the initial working capital adjustments), contribution of the Grand Isle Gathering System, LP (“GIGS”) to the sellers with a fair value of $48.9 million and $105.0 million in new term loan and revolver borrowings (the “Crimson Credit Facility”), all as detailed further below (the “Crimson Transaction”). The preliminary fair value of the aggregate consideration is $343.8 million, subject to certain post-closing purchase price adjustments.

Crimson owns indirectly an approximately 2,000-mile crude oil transportation pipeline system, including approximately 1,300 active miles, and associated storage facilities located in southern California and the San Joaquin Valley. The pipeline network provides a critical link between California crude oil production and California refineries. The California Public Utility Commission (“CPUC”) regulates the rates and administration of the transportation tariffs which comprise the majority of Crimson’s revenue generating activities.

To effect the Crimson Transaction, the Company entered into and consummated a Membership Interest Purchase Agreement (the “MIPA”) with CGI Crimson Holdings, L.L.C. (“Carlyle”), Crimson, and John D. Grier (“Grier”). Pursuant to the terms of the MIPA, the Company acquired all of the Class C Units of Crimson owned by Carlyle, which represents 49.50 percent of all of the issued and outstanding membership interests of Crimson, in exchange for $66.0 million in cash and the transfer to Carlyle of the Company’s interest in GIGS. The MIPA also contains standard representations, warranties, covenants and indemnities. The Company’s interest was acquired with an effective date of February 1, 2021, as contemplated by the parties and documented in the First Amendment to the MIPA.

As described above, a portion of the consideration paid to Carlyle pursuant to the MIPA was the transfer of the Company’s interest in GIGS. In connection with that disposition, the Company and Grand Isle Corridor, LP, the Company’s subsidiary (“Grand Isle”), entered into a Settlement and Mutual Release Agreement (the “Settlement Agreement”) with Energy XXI GIGS Services, LLC, Energy XXI Gulf Coast, Inc. and CEXXI, LLC (the “EXXI Entities”). Energy XXI GIGS Services, LLC (“EGC Tenant”) was the tenant under the Lease Agreement, dated June 30, 2015 with Grand Isle (the “GIGS Lease”). Grand Isle initially received a Guaranty dated June 22, 2015 from Energy XXI Ltd. in connection with the original purchase of the GIGS, which was assumed by Energy XXI Gulf Coast, Inc., as guarantor of the obligations of EGC Tenant pursuant to the terms of the Assignment and Assumption of Guaranty and Release dated December 30, 2016 (as assigned and assumed, the “Tenant Guaranty”). Pursuant to the terms of the Settlement Agreement, the Company and Grand Isle released the EXXI Entities for any and all claims, except for the Environmental Indemnity under the GIGS Lease, which shall survive, and the EXXI Entities released the Company and Grand Isle from any and all claims. As previously disclosed in the Company’s periodic reports, the Company had initiated litigation to enforce its rights under the GIGS Lease, including for non-payment of rent. The parties have agreed to jointly dismiss such litigation in connection with the Settlement Agreement. Additionally, the GIGS Lease and Tenant Guaranty were cancelled and terminated.

The following unaudited pro forma combined statement of operations is based on our historical consolidated financial statements as adjusted to give effect to the Crimson Transaction, GIGS disposition and Settlement Agreement, and related debt financing which were effective as of February 1, 2021 (collectively the “Crimson Transaction Adjustments”). The unaudited pro forma combined statement of operations for the six months ended June 30, 2021 gives effect to the Crimson Transaction Adjustments as if they had occurred on January 1, 2020. Refer to the Company’s Form 8-K/A, filed on April 22, 2021, for additional details including pro forma combined financial information.

The pro forma financial information has been prepared by CorEnergy for illustrative and informational purposes only in accordance with Regulation S-X Article 11, Pro Forma Financial Information, as amended by the final rule, Amendments to Financial Disclosures About Acquired and Disposed Businesses, as adopted by the U.S. Securities and Exchange Commission (the “SEC”) on May 21, 2020. The pro forma financial information is based on various adjustments and assumptions and is not necessarily indicative of what CorEnergy’s consolidated statement of operations or consolidated statement of financial condition actually would have been had the Crimson Transaction and other transaction adjustments been completed as of the dates indicated or will be for any future periods. These adjustments are based on preliminary estimates and will be different from the adjustments based on final acquisition accounting when it is completed, and these differences could be material.

The unaudited pro forma combined financial statements and accompanying notes have also been prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”), including the acquisition method of accounting. The accounting principles are consistent with those used in the audited CorEnergy consolidated financial statements and the related notes included in the 2020 Form 10-K as filed with the SEC on March 4, 2021 and the audited Combined Carve-Out Financial Statements of Crimson California and the related notes included in Exhibit 99.1 to Amendment No. 1 to the Current Report on Form 8-K/A, filed on April 22, 2021, to CorEnergy’s Current Report on Form 8-K filed on February 10, 2021. The financial information should be read in conjunction with the accompanying notes to the unaudited pro forma combined financial information.


	Historical				Transaction Accounting Adjustments
			Crimson California
	CorEnergy		as Adjusted (Note 2)
	Six Months Ended		One Month Ended								CorEnergy
	June 30, 2021		January 31, 2021		Crimson California			GIGS			Pro Forma
Revenue
Lease revenue	$	1,176,000	$	227,050	$	—		$	—		$	1,403,050

Transportation and distribution revenue	49,395,482		8,531,615		—			—			57,927,097
Pipeline loss allowance subsequent sales	3,991,255		—		—			—			3,991,255

Other revenue	774,339		29,358		—			—			803,697

Total Revenue	55,337,076		8,788,023		—			—			64,125,099

Expenses
Transportation and distribution expenses	25,706,007		4,279,536		—			—			29,985,543
Pipeline loss allowance subsequent sales cost of revenue	3,172,502		—		—			—			3,172,502
General and administrative	15,218,447		6,065,147		—			(102,267)		(4a)	20,833,575
								(130,045)		(4b)
								(183,953)		(4c)
								(33,754)		(4d)
Depreciation, amortization and accretion expense	6,646,783		762,640		144,367		(3a)	(6,505,598)		(4e)	1,048,192

Loss on impairment and disposal of leased property	5,811,779		—		—			(5,811,779)		(4f)	—

Loss on termination of lease	165,644		—		—			(165,644)		(4g)	—
Total expenses	56,721,162		11,107,323		144,367			(12,933,040)			55,039,812
Operating income (loss)	(1,384,086)		(2,319,300)		(144,367)						9,085,287
Other Income (Expense)
Net distributions and other income	362,819		—		—			—			362,819

Reimbursable project gains	—		4,537		—			—			4,537
Interest expense	(6,226,710)		(1,547,662)		1,547,662		(3b)	—			(6,725,650)
					(416,395)		(3c)
					(82,545)		(3c)
Loss on extinguishment of debt	(861,814)		—		—			—			(861,814)
Gain on sale of assets	—		72,260		—			—			72,260


	Historical				Transaction Accounting Adjustments
			Crimson California
	CorEnergy		as Adjusted (Note 2)
	Six Months Ended		One Month Ended							CorEnergy
	June 30, 2021		January 31, 2021		Crimson California		GIGS			Pro Forma
Total Other Income (Expense)	(6,725,705)		(1,470,865)		1,048,722		—			(7,147,848)
Income (loss) before income taxes	(8,109,791)		(3,790,165)		904,355		12,933,040			1,937,439
Taxes
Current tax expense	48,241		—		—		—			48,241
Deferred tax expense	108,822		—		—		—			108,822
Income tax expense, net	157,063		—		—		—		(4h)	157,063
Net Income (loss)	$	(8,266,854)	$	(3,790,165)	$	904,355	$	12,933,040		$	1,780,376
Less: Net loss attributable to non-controlling interest	3,620,178		—		—		—			3,620,178
Net income (loss) attributable to CorEnergy Stockholders	(11,887,032)		(3,790,165)		904,355		12,933,040			(1,839,802)
Preferred dividend requirements	4,619,344		—		—		—			4,619,344
Net Loss attributable to Common Stockholders	$	(16,506,376)	$	(3,790,165)	$	904,355	$	12,933,040		$	(6,459,146)

Loss Per Common Share:
Basic	$	(1.21)								$	(0.47)
Diluted	$	(1.21)								$	(0.47)
Weighted Average Shares of Common Stock Outstanding:
Basic	13,655,617									13,655,617
Diluted	13,655,617									13,655,617
Dividends declared per share	$	0.05								$	0.05
See accompanying Notes to the Pro Forma Combined Financial Statements

The CorEnergy historical information has been derived from CorEnergy’s unaudited historical financial statements for the six months ended June 30, 2021. The Crimson historical information has been derived from Crimson’s unaudited financial statements for the one month ended January 31, 2021. Crimson is also referred to as “Crimson California” in reference to historical periods for the entity. Certain of CorEnergy’s and Crimson California’s historical amounts have been reclassified to conform to CorEnergy’s financial statement presentation as discussed further in Note 2. The unaudited pro forma combined financial statements should be read in conjunction with the separate historical financial statements and related notes thereto of CorEnergy and Crimson California. The pro forma combined statement of operations gives effect to the acquisition as if it had been completed on January 1, 2020. The acquisition and the related adjustments are described in the accompanying notes to the unaudited pro forma combined financial statements. In the opinion of CorEnergy’s management, all material adjustments have been made that are necessary to present fairly, in accordance with Regulation S-X Article 11, Pro Forma Financial Information, as amended by the final rule, Amendments to Financial Disclosures About Acquired and Disposed Businesses, as adopted by the SEC on May 21, 2020. The pro forma financial statements do not purport to be indicative of the financial position or results of operations of the combined company that would have occurred if the acquisition had occurred on the dates indicated, nor are they indicative of CorEnergy’s future financial position or results of operations.

As of February 1, 2021, CorEnergy holds a 49.50 percent interest in Crimson and Grier and Grier members hold the remaining 50.50 percent interest. Crimson is a variable interest entity (“VIE”) as the legal entity is structured with non-substantive voting rights resulting from (i) the disproportionality between the voting interests of its members and certain economics of the distribution waterfall in the Third Amended and Restated Limited Liability Agreement (“Third LLC Agreement”) and (ii) the de facto agent relationship between CorEnergy and Grier, who was appointed to CorEnergy’s Board of Directors upon closing of the Crimson Transaction. As a result of this related party relationship, substantially all of Crimson’s activities either involve or are conducted on behalf of CorEnergy that has disproportionately few voting rights, including Grier as a de facto agent. CorEnergy was determined to be the entity “most closely associated” with the VIE. Therefore, CorEnergy is the primary beneficiary and will consolidate Crimson. Grier’s 50.50 percent interest is reflected as a non-controlling interest in the pro forma financial information. The unaudited pro forma combined financial statements have been prepared based on the Company’s consolidation conclusions for Crimson.


	One Month Ended January 31, 2021

	Crimson California Historical		Reclassification Adjustments		Crimson California As Adjusted
Revenue

Transportation revenue	$	8,531,615	$	(8,531,615)	$	—
Transportation and distribution revenue	—		8,531,615		8,531,615

Storage lease revenue	223,650		(223,650)		—
Lease revenue	—		227,050		227,050

Other revenue	32,758		(3,400)		29,358
Total Revenue	8,788,023		—		8,788,023

Expenses
Cost of revenue (exclusive of items shown separately below)	4,366,710		(4,366,710)		—
Transportation and distribution expenses	—		4,279,536		4,279,536

Depreciation and accretion expense	762,640		(762,640)		—
Depreciation, amortization and accretion expense	—		762,640		762,640
Total cost of revenue	5,129,350		(87,174)		5,042,176

Impairment of property and equipment	—		—		—
General and administrative	6,317,286		(252,139)		6,065,147
Total operating expenses	11,446,636		(339,313)		11,107,323
Operating loss	(2,658,613)		339,313		(2,319,300)

Reimbursable project gains	4,537		—		4,537
Gain on sale of assets	72,260		—		72,260
Interest expense	(1,547,662)		—		(1,547,662)
Affiliate management fee	339,313		(339,313)		—


Net Loss	$	(3,790,165)	$	—	$	(3,790,165)

(4f) The amount of loss on impairment and disposal of leased property, excluding the asset retirement obligation was $5.8 million during the six months ended June 30, 2021. If the transaction would have occurred January 1, 2020, the amount of loss on impairment and disposal of leased property, excluding the asset retirement obligation would have been $12.5 million. The difference of $6.6 million is due to depreciation realized since January 1, 2020.

Pro forma net loss per common share is determined by dividing the pro forma net loss attributable to common stockholders, adjusted for the non-controlling interest in Crimson California, and the impact from the transaction and other transaction adjustments outlined above by the weighted average common stock outstanding to determine both the basic and diluted net loss per common share. The pro forma adjustments do not impact the weighted average shares of common stock outstanding.


Pro Forma Loss per Share	Six Months Ended June 30, 2021
Net income attributable to CorEnergy stockholders	$	(1,839,802)
Less: Preferred dividend requirements	4,619,344
Net loss attributable to common stockholders	$	(6,459,146)
Weighted average shares - basic	13,655,617
Basic loss per share	$	(0.47)

Net loss attributable to common stockholders (from above)	$	(6,459,146)


Weighted average shares - diluted	13,655,617
Diluted loss per share	$	(0.47)


Useful Lives
Crude oil pipelines - trunk						35 years
Crude oil pipelines - gathering						15 years
Rights of way						Indefinite
Tanks						35 years
Pumping Equipment						15 years